The Wall Street Journal Op-Ed: Red States Are Tickled Pink Over the Economy- April 30th 2018



 ‘If it bleeds, it leads”—the old journalistic saying is true among the financial media. The most recent source of media-inspired economic anxiety is the idea that earnings growth is too good and American companies are reaching “peak” earnings. The assumption is that the tax cut’s impact on the economy and markets will be ephemeral, a small dose of adrenaline before a return to the “new normal” of subpar growth.

It has been intriguing to my colleagues and me, at a firm that provides research to institutional investors around the world, that a disproportionate share of pessimism about the tax cut is coming from blue states. Meanwhile, some investors in red states are positively giddy about the country’s economic potential. 

Some of this no doubt reflects feelings toward President Trump. But there are three additional reasons for such divergent attitudes among professional investors whose job is to get it right regardless of politics:

• Blue-state investors benefit less. Many highly compensated financial professionals, and their clients, live in high-tax states like New York, Massachusetts and California. Because of the new limit on deductibility of state and local taxes, their overall tax cut is smaller.

• Geographic bias. “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway,” Warren Buffett famously observed. At least part of Mr. Buffett’s success as an investor is because he still lives in Omaha, Neb., far from the madding crowd and its groupthink. If you personally don’t know someone who makes his living in the industrial economy, it is harder to appreciate fully the inducements for capital expenditures embedded in the newly passed tax plan.

• The investment industry’s own headwinds. Although the major stock indexes have registered gains for the past nine years, these have been tough times for the money-management business and the firms like ours that service them. A surfeit of easy money has contributed to higher correlations among stocks and lower dispersion of stock returns, making active managers vulnerable to low-priced passive-investment vehicles like exchange-traded funds. The profitability of an industry that has seen nearly 35 years of uninterrupted growth has come under pressure. Our own difficulties can sometimes make it difficult to appreciate the good fortune of others. 

The most contrarian investment view today is that the tax cut has the potential to extend the business cycle. After nine years, it is natural to believe that the economy is late in its current expansion. Still, this was a very unusual business cycle. Until recently, a combination of perpetually low interest rates and an uncertain regulatory environment prompted many companies to seek opportunities to boost earnings through financial engineering—issuing bonds and buying back stock—rather than genuine long-term capital investment.

The ability of corporations to fully deduct capital expenditures for the next five years, along with a move to a territorial tax system that frees up trillions of dollars in unrepatriated corporate profits, provides enormous incentives for companies to invest in their own businesses. That, in turn, could boost productivity (conspicuously absent in the expansion), support profit margins, and keep unit labor costs low enough so that the Fed has little need to choke off an expansion at a time when wages are finally starting to rise.

One casualty of the financial crisis and its aftermath appears to be the ability for many of us to enjoy good fortune. Investors, and the media who cover the financial markets, should consider the possibility that the best for the economy may be yet to come.

Mr. Trennert is chairman and CEO of Strategas.